For Gerold Bepler, CEO of the Barbara Ann Karmanos Cancer Institute, the aha moment came two years ago.

That's when he realized that $4 million in scheduled 2013 Medicare payment reductions tied to the Affordable Care Act would erase the Detroit cancer hospital's profit on its $265 million budget and drain another $36 million in revenue from 2014-22.

The institute needed to cut costs and increase efficiencies, but those alone wouldn't meet its long-term needs.

That revelation led to the institute's merger with Flint-based McLaren Health Care Corp. It also has led to litigation with its longtime partner, the Detroit Medical Center, that could upend the goals of the merger.

Sale and 2 lawsuits

Bepler's search for a merger partner began in early 2012 as a source of additional capital and revenue to preserve and improve its 700 cancer research programs and the treatment of more than 6,000 patients each year.

Karmanos wanted "to take our high-quality and novel cancer care to a much larger segment of patients than we had access to," Bepler said.

But the institute's long, deep and legally enshrined relationship with the DMC was a significant obstacle that eliminated potential partners that included Henry Ford Health System and Beaumont Health System, a source told Crain's and Bepler confirmed.

The institute's ties to the DMC date to 1995, when Peter Karmanos made a $15 million donation to the Michigan Cancer Foundation, which included the Meyer L. Prentis Comprehensive Cancer Center of Metropolitan Detroit and the cancer programs of the DMC and Wayne State University.The foundation was renamed for Karmanos' late wife, Barbara Ann, who had died of breast cancer.

By 2000, it had built a $100 million endowment, and plans were made to create a cancer hospital inside that would be run by the institute through a contract with the DMC.

But by 2005, the DMC was financially struggling, and Karmanos, worried that its fundraising ability would be diminished in the eyes of donors, offered to buy the DMC's cancer business at Harper University Hospital for $45 million.

However, under the final agreement, DMC agreed to accept $9.9 million in exchange for an agreement by Karmanos to advertise, market services and brand its name only with the DMC in perpetuity in virtually all situations in Wayne, Oakland and Macomb counties.

Bepler said the merger talks also included the DMC, but in April and May of this year it became clear to him and the executive and finance committees of Karmanos that McLaren appeared to be the best fit from a strategic and cultural perspective.

On Wednesday morning, Oct. 30, the Karmanos board voted to approve the sale of the cancer hospital — one of the nation's 41 comprehensive cancer centers — to McLaren for an unspecified amount.

Shortly after the board meeting, Karmanos and McLaren held a news conference at the DMC campus, where Karmanos is housed, that announced the deal.

They did not announce that on the same day they were quietly filing suit in Oakland County Circuit Court to overturn the 2005 agreement and allow joint marketing of McLaren and Karmanos in Oakland County.

On Oct. 30, the day it inked the deal with Karmanos, McLaren also filed a lawsuit against DMC to ask the court for a declaratory judgment that grants it the right to jointly advertise with Karmanos in Oakland County.

The DMC filed suit on Dec. 6 to block the acquisition. A hearing is scheduled on both matters before Judge Wendy Potts on Feb. 12.

'Stifling our ability to grow'

Officials from DMC and the Wayne State University School of Medicine, which primarily staffs Karmanos, immediately criticized the vote, saying they were shut out of the process and not informed.

Wayne State officials have declined numerous requests by Crain's to explain their opposition. They declined comment for this story as well.

Three WSU representatives on the Karmanos board voted against the agreement: Valerie Parisi, M.D., Wayne State's medical school dean; M. Roy Wilson, Wayne State president; and Debbie Dingell, the Wayne State Board of Governors' chair.

Bepler said McLaren's deal was superior to what other health care systems, including DMC, could or did offer. He added that nothing in the agreement with McLaren changes or interferes with the clinical, research and administrative agreement with Wayne State or its physician group.

Key to the deal, sources told Crain's, was that McLaren pledged to spend $80 million over four years. The capital infusion would fund clinical trials, upgrade Karmanos' downtown hospital and expand its two outpatient centers in Farmington Hills and Monroe.

Bepler said Karmanos became frustrated that DMC "was stifling our ability to grow" and attract patients outside of metropolitan Detroit.

For example, the DMC successfully sued to prevent Karmanos in 2007 from moving its operations to shuttered Riverview Hospital on Detroit's east side.

Recently, Bepler said, "the separation agreement didn't allow us to bring our care out to the community where we can do some good."

Conrad Mallett Jr., DMC's chief administrative officer

But Conrad Mallett Jr., DMC's chief administrative officer, said the DMC thought it was making progress in talks over the past several months with Karmanos about enhancing its 8-year-old affiliation agreement.

"A new relationship was discussed in which DMC would assume significant costs that would allow Karmanos to maintain its corporate integrity and allow it to carry out its medical and research mission more cost-effectively," Mallett said.

"DMC would take expenses on its books, and we would provide support and other management services to Karmanos in exchange for a new relationship," said Mallett, who added that specifics were not discussed.

"The DMC came back and was pleased that the conversation was pleasant," he said. "We anticipated that we would start to put things on paper."

Mallett told Crain's that the agreement between Karmanos and McLaren, announced four days after the meeting, surprised and angered DMC officials.

"It is clear Karmanos breached its agreement with DMC," said Mallett, adding: "What is not clear is the impact any agreement between McLaren and Karmanos will have on Detroit.

"We are very concerned that the Detroit community, which suffers from some of the highest rates of cancer in the country, will be negatively affected by this affiliation," he continued. "We can't stand by and say 'good luck and Godspeed.' "

But Bepler had a different view of the Oct. 26 meeting and of the many meetings with DMC officials.

"It is overstated that it was a very positive meeting," Bepler said. "DMC never came across as making a real offer about how Karmanos could be integrated into their system. We were expecting a tangible and serious offer."

Bepler confirmed that Karmanos met multiple times with DMC starting in May about working more closely together under the framework of the existing affiliation agreement.

"We kept talking with them all the way to the end. We wanted to find out how interested they were," he said. "The talks never really amounted to anything. It was like big brother talking to little brother."

For example, Bepler said, Karmanos wanted to reduce prices it paid to DMC for such services as security, housekeeping and laboratory.

"About a year ago, we received a proposal for services. They upped the prices we were paying. We already knew we were paying too much," Bepler said. "They talk about wanting a partnership. But a partnership isn't squeezing the last drop of blood from us."

Mallett said the recent talks would have provided pricing relief and other financial benefits to Karmanos.

For-profit vs. nonprofit

But Bepler said he and members of the executive committee never felt easy knowing that DMC's for-profit owners, Tenet Healthcare Corp., were based in Dallas and that DMC is just eight of Tenet's 77 hospitals in 14 states.

DMC completed its acquisition by Tenet on Oct. 1 after Nashville, Tenn.-based Vanguard Health Systems, another for-profit chain, took over DMC on Jan. 1, 2012.

"It never really came to a level or partnership and enthusiasm between us," Bepler said. "We felt much more comfortable partnering with a system (McLaren) that is Michigan-based and nonprofit, like us."

Mallett said Karmanos' 50-member board of trustees was not informed about the McLaren proposal until the day of the board meeting.

"I seriously doubt that if the Karmanos board had the ability to fully vet the McLaren proposal that it would have made it to first base," Mallett said.

Bepler confirmed that the Karmanos board, including the Wayne State representatives, were not briefed about talks with McLaren until the Oct. 30 board meeting.

"The executive and finance committees are charged with taking recommendations to the board," Bepler said. "If the executive committee believes it is in the best interests to buy equipment or partner with someone, they will recommend it to the board."

When asked why he didn't inform Wayne State of the talks with McLaren, Bepler said he felt the agreement with McLaren would not interfere with Wayne State and its relationship with Karmanos.

In late November, Bepler was removed by Wayne State as interim chair of the university's department of oncology and associate dean for cancer programs. He had held those posts since becoming CEO of Karmanos in February 2010. He still is on the Wayne State medical school faculty.

"We didn't tell DMC directly because we felt they might interfere in part of the process," said Bepler, adding: "We felt they understood we were in talks" with McLaren when the Oct. 26 meeting occurred.

"We believed they knew we were talking with McLaren and expected a serious offer. We didn't get one."

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If you enjoy the content on the Crain's Detroit Business Web site and want to see more, try 8 issues of our print edition risk-free. If you wish to continue, you will receive 44 more issues (for a total of 52 in all), including the annual Book of Lists for just $59. That's over 55% off the cover price. If you decide Crain's is not for you, just write "Cancel" on the invoice, return it and owe nothing. The 8 issues are yours to keep with no further obligation to us. Sign up below.